Apple to Boost Pure-Play Foundry Growth

SAN FRANCISCO — Sales by pure-play semiconductor foundries are forecast to rise by 21 percent this year, thanks largely to Apple's decision to move production of key chips from Samsung Electronics to TSMC and potentially other foundries, according to market research firm IHS. The 21 percent growth forecast is considerably higher than the 5 percent growth that IHS projects for the total semiconductor industry.

IHS expects pure-play foundries -- those companies that strictly build chips for other firms on a contract manufacturing basis -- to cumulatively achieve record sales this year. Pure-play foundry revenue increased 4 percent to $8.2 billion in the first quarter of this year, up from $7.9 billion, IHS said. Meanwhile, overall semiconductor industry revenue declined by 5 percent over the same period, IHS said.

The market research firm believes that the pure-play foundry industry also outperformed the rest of the chip industry in the second quarter and that it will go continue to perform strongly in the second half of this year.

"The growth outlook for the pure-play foundry business has risen considerably in anticipation of Apple's transition of its applications processor chip manufacturing to third-party manufacturers," said Len Jelinek, director and chief analyst of semiconductor manufacturing at IHS, in a press statement.

Reports about Apple transitioning all or part of its applications processor foundry work from Samsung to TSMC -- the world's biggest pure-play foundry -- have persisted for over a year. Samsung, which also builds chips for sale and for Samsung products, is labeled an integrated device manufacturer (IDM).

While the semiconductor industry as a whole remains heavily dependent on chips sold into the PC market, IHS said, foundry companies have to a greater extent become reliant on chips for the booming wireless segment. As a result, revenue for foundries has been expanding steadily.

But despite the prospects for strong growth in 2013, several threats to pure-play foundries are present, according to IHS. Among these threats are increased competition from IDMs including Samsung and Intel. The top foundry suppliers are now for the first time facing technological competition from such IDMs, and are no longer competing just with one another. The market research firm predicts that IDMs and foundries will race with one another to implement new lithography technologies, ultimately shortening technology cycles and creating fierce competition.

As several IDMs attempt to revamp their manufacturing models and move to new and more efficient lithographies, incumbent foundries will be forced to accelerate internal technology development. The race between the two rival groups will result in a shortening of technology cycles and fierce competition among participants. A company unsuccessful in execution will inevitably lose important market share and be weakened, or worse, forced out, IHS believes.

Ultimately the consumer will be the winner. Technological developments will provide designers the ability to integrate multiple functions onto a chip, offered at a unit cost that results in cheaper, yet more powerful, consumer products.

This will obviously be a boost to foundries. I wonder how much of Apple's shift is based on: a) its nasty public spat with Samsung; b) its fame for ultra-secrecy around new products; c) cost savings. I also wonder if this will have longer-term ripple effects down the road that will lead to further divergence between Samsung's Droid phones and Apple's iPhones.

Personally, I don't believe that cost has anything to do with it. To my knowledge, there is no evidence to suggest that having its chips built by TSMC will save Apple any money. I thinkit has everything to do with the IP fights. It seems like common sense that when you believe that a supplier has lifted your intellectual property, you are probably better off having a different company build your chips. Just my opinion.

This IHS report makes the point that with Apple's expected shift to TSMC, pure play foundries will be getting a bigger slice of the pie than they did before. My question is, does that matter? Samsung is competing head to head with the pure play foundries and wether Apple's chips are built by Samsung or TSMC, they are contributing to the size of the foundry industry. From a customer perspective, the only difference I can see (process technology being equal) is the issue of wether you want to have your chips built by Samsung or Intel when they may be at some level a competitor. This has always been a knock on Samsung's foundry operation. And Samsung is such a broad company that it must compete with just about everyone on some level.

Another issue that traditionally dogged Samsung and other memory chip vendors that did foundry work is what happens when an upturn comes and your capacity utilization shoots up? Do you still build chips for other companies or do those move to the back of the line, after your own products? Samsung has obviously overcome this issue and has fabs dedicated to foundry work. If Intel continues to increase its presence in foundry, I wonder if this will be an issue for Intel.

To the first question, I believe that IHS is not saying that the only reason for pure play foundry growth this year is the Apple move. I'm interpresting, but it seems like pure play foundries were going to have a pretty good year anyway, and this is just icing on the cake. But it's a lot of icing. Last year, IHS predicted that Apple would spend $28 billion on chips in 2012.